Family Firm Financial Reporting Is Cheaper and Better

by FEI Daily Staff

Financial reporting from family-owned firms is cheaper, more accurate and of an overall better quality than other types of companies, according to a new study.

“Our findings provide compelling evidence in favor of the explanation that auditors charge less from family firms because of superior reporting quality, which lowers audit risk and, therefore, the need for greater audit investments,”  concludes a study conducted by Professor Al (Aloke) Ghosh, Professor of Accountancy at the Zicklin School of Business at Baruch College in New York.

The paper was recently accepted for publication in the Journal of Accounting and Economics.

The study focuses on pricing of audit engagements as a proxy for disclosure quality, arguing that because financial reporting quality affects audit risk, that robust financial disclosure will be reflected in how auditors price engagements.

Audit fees are significantly lower for family firms relative to non-family firms, the report states, explaining that the median audit fees for family firms is $1.2 million and $1.85 million for non family firms.

“These results provide some evidence that audit fees are lower for family firms and these differences continue to remain lower across different size portfolios.”

The research dismisses the argument that the fee discount may be attributable to lower litigation risk since family firms are not as susceptible to shareholder class action lawsuits. The researchers point out that litigation data finds “no reliable difference in auditor lawsuits between family and non-family firms. “

Finally, the study research concludes that because audit risk is lower for family firms, the “fee discount” is lower for family firms with high audit risk and that family firm auditors “work less to provide the desired level of assurance.”

Given that family firms account for 85 percent of all companies worldwide and employ 80 percent  of the U.S. workforce, the researches argue that examining audit fees provides insights into an important driver of the U.S. and global economy.

This story was updated on 2/18 to reference the author of the study.